I have studied internet growth shares very closely ever since 2010. In a stroke of genius, I valued Amazon.com, Inc. as too expensive at that time. The Amazon share price is up 1,675.83% since then.
Australia’s geographical remoteness, not only from the world but also from each other, is well suited to online commerce. The country is presently seeing a spurt of growth for internet banks, none of which are currently listed on the ASX, as well as a continual smattering of small startups predominantly in the software-as-a-service (SAAS) category.
Software as a service
There are several outstanding Australian SaaS companies on the S&P/ASX 200 Index (INDEXASX: XJO). The largest of these is Xero Limited (ASX: XRO). The internet growth share posted its first profit since listing on the ASX last week and saw its share price dip by 8.7% over the week. With ~2 million users, investors are keen to see the company focus on customer acquisition and product development.
The company has grown its customer offerings. Initially it was a pure play cloud-based accounting package. It has since added a range of related functionality areas. These include bank streaming for reconciliation, payroll and inventory tracking. The platform also includes ~800 add on business apps from other providers, embedding it further as business infrastructure.
Xero sees an annual customer churn rate of ~10%. The majority of this is due to companies going out of business, underlining the company’s staying power. That is, most organisations purchase the service and stay with it.
Internet growth shares in retail
There are 2 major online service providers in the retail space. The first is the country’s current leading internet growth share, Afterpay Ltd (ASX: APT). The second is Kogan.com Ltd (ASX: KGN). Of these 2 shares, I prefer Kogan for a medium- to long-term growth prospect.
The Afterpay empire is built on foundations of unsecured debt. In times of economic hardship, unsecured debt is the first to see defaults. Additionally, the company has already spawned a range of copycat products. While its integration with providers and functionality is pretty slick, that alone doesn’t constitute a competitive advantage.
Kogan, on the other hand, continues to grow steadily. Aided by stay-at-home conditions, Kogan delivered an impressive Q3 result. The company reported increases against the prior corresponding period of 30% gross sales and 23% gross profit. March saw the company record its largest ever increase in active customers since its IPO.
Additionally, the company announced on Friday the purchase of leading furniture company Matt Blanc for $4.4 million. This adds to its portfolio of companies with strong supply chains. Unlike Amazon, Kogan produces much of its own merchandise, meaning it can not only compete at higher margins, but its products can also be sold on Amazon’s Australian website. The company also has additional services such as insurance, which sets it apart.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool Australia owns shares of and has recommended Kogan.com ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Amazon. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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